Silicon Hutong

Wed - April 11, 2007

SILICON HUTONG HAS MOVED!!! SILICON HUTONG HAS MOVED!!!

Update your bookmarks and your RSS readers, folks.

We've done it.

Silicon Hutong, and it's sister blog Peking Review - soon to be joined by EcoHutong - are now hosted at typepad.

• Silicon Hutong is at http://siliconhutong.typepad.com/silicon_hutong/. Outside of China, http://www.siliconhutong.com will do.

• Peking Review is now at http://siliconhutong.typepad.com/peking_review/, WITH all of the archived posts (there weren't that many, embarassingly). Outside of China, http://www.pekingreview.com works, too.

• EcoHutong is at http://siliconhutong.typepad.com/ecohutong/. Outside of China, http://www.ecohutong.com does fine.

Please keep this bookmark for past articles - I'm just not up to the task of moving all of it over, and I want the old links to remain valid for those of you who have linked to some of our pieces over time.

Sorry for any inconvenience. Really, the new sites will be MUCH easier on the eyes, if nothing else, and hopefully more convenient in a lot of ways, including:

• Better Permalinks

• More information

• Easier trackbacks

• Better comment features.

Thanks again. Give me a shout if you encounter any problems.

Posted at 08:09 PM

Sun - April 1, 2007

Hutong Rush

In the Hutong
Cleansing my home of all things leavened
2011 hrs.

You may have noticed a bit of an increase in activity on the Hutong of late. That's not accidental. There are six new posts below from the last 48 hours, as we are coming up on Passover and I will be therefore in the Hutong but away from the computer for 5 days out of the next 9. Since clients have to come first, I'm saving that other time for them, and I appreciate your understanding.

In the meantime, I want to update you on a couple of cool things happening in the Hutong:

1. Our sister site, The Peking Review, is getting updated more regularly as well. If you haven't stopped by yet, give it a look and book it into your newsreader. I'm moving my growing list of reviews of books, articles, websites, and the like over there so I can keep Silicon Hutong relatively focused.

2. One of the strategic shifts that is taking place in the technology industry is the growth in innovation and activity around sustainable and environmentally friendly products and services. There is a lot to take in around these subjects, and I'm hardly an expert, but I'm learning. I want to share this learning process, and I will be doing that in a new site to be called EcoHutong. I've also added an "EcoHutong" category here in this blog for cross-posting some of the more analytical pieces. Watch this space for more announcements.

3. While the orange and black colors are fine in small doses - like my company logo - I'm getting a little tired of seeing them on this site. In addition, the features available to me using iBlog (fine software, but last updated in 2005) and hosting on .Mac limit me in the ways I can format my site or make it more readable/useful. Short of taking time neither I nor my colleagues James and Sunny don't have to learn HTML, I need a new solution. If you have any ideas of a good blog services provider that a) I could use on a Mac, b) won't cost me an arm-and-a-leg, and c) does not habitually get blocked by the Network Nannies in China, I'd be grateful if you could let me know, either via comments or to my e-mail (david@siliconhutong.com).

Meantime, if you're celebrating, have a Happy Easter/Passover, and thanks again.

David

Posted at 08:25 PM

SAP: Choosing the Future

In the Hutong
Choking on a Centrum
1923 hrs.

Renee Ferguson over at eWeek wonders whether Shai Agassi's departure from SAP signals that SAP will "sink back into stodginess."

I've spent a little time working with the folks at SAP on stuff here in Asia (though not anymore), and I think both the markets (SAP dropped 2.4% at one point following the announcement) and eWeek are making a big deal out of nothing.

A Team of Leaders

Sure, Shai Agassi loves to jump in and mix it up a bit in press conferences and the like. Agassi stood alone among SAP's leadership in his willingness to talk trash about the competition, especially Larry Ellison and the rest of the San Mateo Mafia. That kind of stuff makes for good copy, and tech journalists like Ferguson understandably like good copy.

I think what eWeek is worried about is not SAP's stodginess: she's worried about finding somebody colorful to write about.

Frankly, SAP's management team has plenty of colorful characters. I continue to be a big fan of Henning Kagermann, the current CEO, who comes off as friendly, professorial, and brilliant. His quiet, strong leadership is probably best likened to that of Reuben Mark, the anti-celebrity CEO of Colgate-Palmolive who eschews the limelight in favor of - get this - actually leading the company and driving performance.

People also may not realize that Leo Apotheker is a no-nonsense guy who is every bit as capable as Agassi of colorful talk. That he keeps it restrained is more of a reflection of SAP's desire to avoid dancing on the heads of competitors. The company was born as an underdog, and triumphalism does not suit them. Watch Leo in an SAP sales conference, however, and you get the feeling that the troops adore him.

What Plays In Peoria

Finally, most of the Valley crowd has yet to figure out that the sort of broadsides that Ellison likes to hurl tend to backfire outside of American - and perhaps European - culture. For all of his Japanophilia, Ellison seems to have trouble with something the SAP team seems to know instinctively: in the enterprise software business, you sell to the world, not just to Americans. The remarks that bring guffaws in New York and San Francisco can elicit little more than shaking heads in large parts of Asia. One man's F.U.D. is another man's silly trash-talk. As any company in the enterprise software industry will tell you, Asia is where the growth is, both in licensing and service. Over here, strong, silent, mature confidence wins over more decision makers than dissing - or suing - the competition.

Here's my question: what happens if you match up, man-for-man, the leadership teams at Oracle and SAP? Which company - lawsuits and recent forecasts notwithstanding - looks like the better bet in the long term?

SAP should be applauded for being ready to sacrifice such an important executive to something far more important - the long term stability of the company and its products and services, which together form a platform on which many of the worlds biggest (and smallest) businesses depend. Journalists and analysts must remember that in the end, SAP made a choice that put its customers ahead of the stock price.

Posted at 08:10 PM

The Three World Planet of Mobile Handsets

In the Hutong
Avoiding the raging mobs of spring breakers
1747 hrs.

The trendmeisters in residence at PSFK have come to the conclusion that mobile phone usage habits vary significantly across the world's regions. They're spot on.

They divide the world into 3 regions, based on the rate at which both the Internet and mobile phones diffused into the population:

Region 1: North America, where people mostly had Internet before mobile phones;

Region 2: Europe, where people got mobile phones and the Internet at the same time; and

Region 3: Asia (East, West, and South), Africa, and South America, where for most of us the mobile phone preceded the Internet - and for many in these regions, still does.

The theory is that the later we got Internet versus our phones, the more reliant we are on phones as our primary device for digital access, and as devices to enhance our lives. It's an attractive idea, especially in its simplicity. I'd say there are probably other issues involved, but I'm ready to grant their idea for the sake of argument.

The article focuses heavily on North America, but gist of the article is basically that if you are in the mobile handset, software, or services business and you count on there being a single usage model the world over, you're road kill.

My one quibble with the article is that it doesn't go far enough.

Suggesting that there are no - or minimal - differences between the way the handset is used in Japan or Korea as opposed to, say, India, or Australia is nuts. Asia, as an old friend of mine used to say, is not a place. Asia is an accidental geographical agglomeration of highly diverse countries and cultures. For that reason, you need to think about designing handsets, services, and software for specific countries.

My pals at Motorola get this. The MOTORAZR that sells in China is different than the MOTORAZR that sells in Korea, which is different than the MOTORAZR that sells in Japan. And the differences go beyond the launch screen, languages, and a few .apis. Apart from the iconic design and trademark colors, each of these are phones designed specifically with the users in that country in mind.

That's also why they drive their R&D and design deep, deep into the local markets: 16 R&D centers in China alone.

Simply sticking a design center into a trend-setting place like Los Angeles isn't going to capture a significant chunk of a diverse global market. Nor is creating phones in a small town near the Arctic circle, or a company compound near the DMZ.

In the long term, the global handset will give way to the individual handset. The winners in the mobile telecommunications business are going to be the ones who enable that first.

And by the way - that goes DOUBLE for China.

Posted at 07:02 PM

Say with me: I AM (I AM) SOMEBODY (SOMEBODY)....

In the Hutong
Enjoying the breezes of spring
(and praying they don't carry dust, sand, and rocks)
1537 hrs.

Reading more of Diligence China (great stuff, I'm not kidding) and one of Andrew's old posts about different companies in the economy. I tried to write him a comment, but for some reason the blog smacked me out, so I'm posting it here.

This was in response to his post "New China JVs, Look Local, Act International."

In the post, Andrew discounts the importance of small business-to-business service companies to the overall Chinese economy:

"On paper, these are Chinese companies. Many of these register locally and show up in government statistics as local businesses. The reality is that they usually behave like mini-MNCs, and often make up part of the multinational service supply chain. These are the lawyers, accountants, programmers, consultants, designers, etc. that have been powering the MNCs drive towards success in the China market.

They are important to the Chinese economy, and will continue to make many valuable contributions to the internationalization of places like Shanghai, Suzhou, Hangzhou, Beijing and Shenzhen. But these are mainly vehicles for individual service providers to register and operate. Like many business startups that center on a few talented individuals, they have difficulty sustaining growth and aren’t particularly scalable. While they are invaluable to the MNC supply chain, they probably won’t be a source of significant innovation or large-scale international brands."

To which I responded:

Andrew,

Great stuff, as always.

Regarding small business-to-business service firms, I generally agree with the post, but I want to address several of your points.

First, while such firms tend to start small and focused around a talent cluster, with the right care they can actually scale. This is a matter of management, not of nature. I've seen this happen with four firms off the top of my head in computer services, advertising, and printing.

Second, they start as a part of the MNC supply chain, but they grow outwards from there to service other entrepreneurial enterprises, government, and, increasingly, Chinese firms. Many of these companies are cultivating the expertise to take Chinese brands overseas in the same way they built competency helping MNCs come to China.

Third, regardless of whether these companies grow beyond a few dozen employees, their economic effect is huge. Apart from paying healthy salaries and transferring some essential skills, these companies are hothouses for the corporate counsel, controllers, CFOs, CMOs, designers, architects, project managers, and salespeople who will drive the success of Chinese enterprises both here and abroad.

Fourth, as to innovation, while these firms will not develop quantum computing, room-temperature fusion, or efficient photovoltaic cells, they are driving innovation in service provision that is putting global players in their businesses on their back foot. That's possible because of the dynamism of the market. Business services in the US and Europe are horribly ossified. Not so in China - we are redefining these industries as we speak.

To dismiss out of hand the significance of such enterprises merely becuase they will not create large scale international brands misses the point: large scale international brands are by no means the sole - or best - measure of economic success. They are simply the most visible.

The fact is, China has built much success so far without international brands. If it can continue to find ways to make the best use of its resources by either buying brands from other companies or serving as the substance behind other global brands, does that make China's success any less valid?

Love the blog - you make me think.

David

Posted at 03:59 PM

This is Not Your Father's Capitalist System

In the Hutong
Watching the kid play with his first plastic soldiers
1352 hrs.

Catching up on my reading, I just finished an excellent piece by Andrew Hupert over at Diligence China on China's Statist Entrepreneurship.

Hupert gives the single best, most pithy, most insightful overview of the nature of China, Inc. that I've ever read. I won't excerpt it here because I believe you should take the time to read the 10 paragraphs of the post.

My one issue with the article is that while it is an excellent and accurate snapshot, it suggests that this is the way things will stay.

Problem One: Real Entrepreneurs

I actually see China as becoming more diverse. While policy and administrative guidance remains critical to many enterprises, the economy is growing far too fast for the bureaucracy to retain effective control over all economic activity. The amount of business being done around the margins and outside of day to day state control is growing. As Statist Entrepreneurship grows, real entrepreneurship is flourishing in some remarkable places.

This chunk of the economy is driven by small- and medium-sized firms owned and operated either by foreigners, returnees (sea-turtles) or overseas Chinese. As long as you're legally established, pay your taxes, keep good books, stick to your approved business scope, and don't get into any legal hassles, government has very little to do with your business, and it is increasingly possible to run a good business in this space.

This is an especially vibrant and rapidly-growing sector, and will become a growing nexus of growth in the coming years.

Problem Two: Apparatchiks Can't Dance

Statist entrepreneurship depends on close interaction between enterprise and bureaucrats, and as Hupert notes, stakeholders (read: bureaucrats) rather than shareholders (read: investors) are the primary audience to whom statist entrepreneurs must play.

The challenge is that this interaction - being as it is functional rather than structural - is a painstaking process, and therefore slows the enterprise considerably. If all of the enterprises in a given sector are statist in nature, then no problem - the guy with the best guanxi wins. But if there are players in the sector that operate outside of that model - including companies that are intruding via an emerging business, like the Internet - then all bets are off.

Statist entrepreneurs are constrained by the interests of the bureaucracy, and thus cannot respond to consumer demand, opening the door to more classical entrepreneurial activity.

To the Entrepreneur go the Spoils

Efficiency may not be everything in a place like China. But if nothing else, it is an incredibly caustic chemical, eating away over time at the business of statist enterprises who face rivals who have it when they don't

Take the entertainment distribution business in China. China Record Corporation, China Film, and companies like them are statist organizations, not only owning great guanxi but functionally owned by the state. These companies, constrained by bureaucratic rule, are unable to respond with any kind of alacrity to consumer demand. Their business is increasingly sidelined by the massive ecosystem of black market (pirated) and grey market (imported) product that simply works around them.

Where is Red Flag Linux, a classically statist venture? Being left in the dust by more nimble upstarts like Red Hat and Canonical.

I look around and I find that my needs are increasingly wells served by classically entrepreneurial companies. I buy my shirts from a tailor working out of a tiny shop. I eat at places like Little Italy, Peter's Tex-Mex, and Dini's. All of my business printing is done at Empire Graphics. Groceries come from Jenny Lou, not Wankelong.

Policy, Administration, and the Consumer

Admittedly this doesn't cover the entire economy, but you get my point. The Chinese economy is NOT the US economy, or is it Japan or Singapore. Chinese businesses take on a huge variety of forms and structures, including SOEs, MNCs, joint ventures (may they be allowed to die soon), statist enterprise, and private enterprise. Each of these exerts an effect on the other in every major industry, and it is the dynamic interaction of these that that is driving the evolution of business in the PRC far faster than the WTO or any form of centrist policy changes.

China slows down when policy makers become uncomfortable with that process. And why shouldn't they? The process is messy, unpredictable, and often ugly. All of that is anathema to people raised in a paternalistic culture and a central-planning driven polity. Nonetheless, as recent debates about private property and bringing entrepreneurs into the Party show, they know they can slow it but they cannot stop it - unless they are prepared to close a major social and economic safety valve that absorbs a lot of surplus labor.

In the end, the thing to remember is that there are three major forces driving business China:

> Policy, as made at the highest levels of government, that lays out the broader playing field (include in here the codified laws passed by the NPC and similar bodies);

> Administration, or the ways law and policy are interpreted by bureaucrats at local, provincial, and central levels, and how that affects the way they manage SOEs, influence statist enterprise, and tolerate or ignore private enterprise; and

> Consumers, who by sheer dint of buying power and a growing consciousness of the influence they can exert on business and administrators, are becoming in increasingly vocal and potent force.

Plus ca change

My friends and I like to remind ourselves that in China, everything is possible, but nothing is easy. In other words, the status quo has a vote, not a veto. As important as it is to understand Hupert's well-made argument, it is equally important to understand why things won't always be this way.

Posted at 03:04 PM

Sat - March 31, 2007

Motherboards Aren't The Only Green Technology

In the Hutong
Hugging Trees
2206 hrs.

We're following green technology VERY closely here in the Hutong...in fact, we'll have a major announcement along those lines in the coming weeks.

So the fact that Vermont's governor is coming to China to help promote green industries caught our eye. Talk all you want about biotech. The reality is that the next Great Tech Wave will be coming from companies developing clean energy and other technologies designed to help us live and work greener.

Jim Douglas has figured that out, as has California's Governator. What continues to mystify me is why China remains so dead set on reinventing the microprocessor, Wi-Fi, 3G, and other technologies when opportunities like Eco-tech - where there are as yet no multibillion-dollar sector leaders - beckon with the promise of both local leadership and global dominance.

If China's government doesn't get moving in this direction quickly, they're going to find themselves playing catch-up in EcoTech the same way they are doing in information technology and communications technology.

Given the magnitude of China's challenges in that area, that would be a great pity indeed.

Posted at 10:18 PM

Ugly phones in pretty print dresses

In the Hutong
Watching "Trading Places" for the 95th Time
2137 hrs.

Nokia introduced its 5070 in two colors each .

And the same for it's 5700.

Wow. Colors.

See, the phones are still fat, still boring, and still ugly. But they have colors.

This is what they call design innovation?

No wonder Nokia is building a reputation as an "old man's handset."

Let's face it: Nokia phones are only for people who couldn't give a damn what their phones look like. And it appears the numbers of those people are falling worldwide.

Posted at 09:46 PM

Sun - March 25, 2007

TD-SCDMA: Tough Fights and Trough Rights

In the Hutong
Putting away the goose down, pulling out the shorts
2117 hrs

Much has been made of a recent remark by Chen Haofei, Secretary-General of The TD-SCDMA Forum, noting that China Mobile had already invited bids to supply network gear for the operator's eight-city trial 3G networks based on the locally-developed standard.

(TD-SCDMA, of course, stands for "Time Division Synchronous Code Division Multiple Access." In the wake of the painful development process around the standard, wags here in the Hutong have termed it the "Tang Dynasty System that Can't Do Much of Anything.")

It looked like most of the business - like 90% - would go to local producers, frustrating a friend of mine in the mobile communications industry in Europe.

He was steamed, but I pointed out a few important points:

1. Nothing is real until the gear is delivered, in place, tested, and working. Until then, all bets are off. Quoting my mentor Corb Donohue, in China, the longest distance between any two points is the distance between the high-five and the check.

2. This is only a trial system. There will be plenty more opportunities to get in on contracts. Frankly, what a blessing to be left out of this first mess. Trying to integrate a network using a technology nobody has ever used before in a highly-politicized environment cannot be any sales engineer's idea of "fun."

But most important:

3. China does not create these massive infrastructure projects in order to provide a commercial buffet to foreign companies. Whether we're talking about the Beijing Olympics, the Three Gorges Dam, direct-to-home satellite television, railroad upgrades, airport construction, or telephone networks, regardless of the project you can be assured that the government is going to give every possible penny to local companies first. Once as many contracts and subcontracts as possible are handed to the locals, then - and only then - will they begrudgingly turn to foreigners.

And yet, the announcement of a major infrastructure project always gets a long list of foreigners drooling, and the scrambling begins.

I'd say the best position to be in with the TD-SCDMA trial network is as a close observer in constant conversations with China Mobile. Learn from the mistakes and challenges others experience, and get your people to work on second-generation projects.

Either way, be ready for a fight when the actual network is launched. The challenge in the end won't be making the sale: it'll be making any money in the hypercompetitive typhoon the network will create among equipment vendors.

Posted at 09:44 PM

Thu - March 22, 2007

Thinking Blogger

In the Hutong
Feeling tagged
1510 hrs.

Kevin Smith over at The Weifang Radish has honored the Hutong with a Thinking Blogger Award.

Having been duly tagged, I am obliged and pleased to designate 5 blogs that make me think. In no particular order, they are:

1. China Law Blog and Dan Harris - Dan understands that the law is supposed to serve business, which already makes him a rarity. The fact that he practices from Seattle and exhibits a deep understanding of China defies my normal characterization that a Chinahand must live in China.

2. Asia Logistics Wrap by Shawn Bielfuss - Shawn is brilliant - should be teaching at Harvard or Wharton - and you benefit from his brilliance without paying the tuition.

3. Imagethief by Will Moss - Incisive social commentary in China delivered by one of the funniest guys I know.

4. Maneuver Marketing Communique by Mike Smock - Mike Smock makes marketing asymmetric: he enables smaller challengers to upend bigger competition. If business is war, Maneuver Marketing is unconventional war.

5. DiligenceChina by Andrew Hupert - It never ceases to amaze me how many companies leave their common sense and their reasonable care behind when it comes to entering China. Andrew is there to remind us, and he does it brilliantly.

Dammit! Somebody else nominate me. I've got about 10 more sites...

Posted at 06:10 PM

Sun - March 18, 2007

Intel makes Dalian Fab

In the Hutong
Unsure who is suffering more through my son's piano lessons: him, me, or his teacher
1216 hrs.

One point to add to the increasingly vigorous debate around Intel's plan to set up a semiconductor fabrication facility ("fab") in China:

Intel ranks high in my ratings of companies who are China savvy, and make business decisions in China on the basis of what makes commercial sense, not on what makes government officials smile. Simply knowing what I do about their decision-making process on these matters I can tell you that this is not some multi-billion dollar exercise to suck up to Beijing.

Anyone seeking to hurl boulders at this move - and I include our distinguished solons in Washington in this group - had best look at the commercial realities. Leaving aside for the moment that the technology Intel is moving to China is at least two generations behind what is considered to be the state-of-the-art, the market for their products have shifted heavily to China.

Closer to the Customer

The PriceWaterhouseCoopers annual update on China's semiconductor industry is an excellent source of information on the business, and PWC should be complimented for making this resource publicly available. (Full disclosure - PWC does my taxes.) The most recent report points out some interesting facts:

• China accounts for 25% of the global market for semiconductors.

• Over 86% of the growth in global semiconductor consumption in 2006 came from China, a trend that is expected to continue well into the future.

• At the same time, only 7% of the global semiconductor manufacturing capacity is in China.

Something tells me that the hard-headed people at Intel are purely responding to customer pull in a business environment that is increasingly hostile to imported components.

Washington's Response

Whether that will be good enough to convince our elected - and appointed - policy makers in Sodom-on-the-Potomac remains to be seen.

They'll say that semiconductors fit comfortably and cheaply into the belly of an airplane, and that in this increasingly connected world, it doesn't really matter where you make such high value products.

They'll say that semiconductor fabrication demands large quantities of clean water - a resource in shrinking supply in China.

They'll point out that there is no competitive challenge to American dominance of the microprocessor industry from China or from Europe to justify the move.

And that's before they dive into issues of national security, offshoring American jobs, and support of a country with a political system a lot of Capitol Hill's denizens find objectionable.

Intel has a fight ahead of them. But I'm betting on the Boys (and girls) from San Jose.

Posted at 01:19 PM

Libertarians and High Tech "Engagement" in China

In the Hutong
Getting ready for my trek to Starbucks
1036 hrs

I continue to be frustrated by the rodent-level rhetoric employed by the mainstream political parties in the US vis-a-vis allowing US Internet and technology companies to continue to do business in China. Despite the merits of bipartisanship, most of our elected and campaigning officials tend to ignore the reality those of us who have actually LIVED in China for a while understand instintively: US technology companies operating in China are mostly good for the Chinese people.

I'm not going to go deep into why, but if you want a far better expression of both sides of the discussion, check out this debate between two of the brains at Libertarian think-tank Cato Institute.

It underscores a key point: there are degrees of collaboration. There is a difference between complying with an objectionable law to the minimum extent possible, and doing everything you possibly can under the law to attempt to prove yourself "redder than red" in order to ingratiate your company with Chinese officials.

In reality, I think it is crossing that invisible but tangible line that concerns most of the sensible people who are concerned about the issue.

What is upsetting the blogosphere about the recent ruling in favor of Yahoo! Hong Kong, for example, is that there appears to be a perception that somewhere, somehow, Yahoo! crossed that line in China.

At some point, companies like Alibaba/Yahoo!, Google, and MSN (and possibly Cisco) are going to be called upon to prove that they live on the "doing the least possible" in terms of compliance to objectionable laws, and are indeed doing the most possible to improve things in the PRC.

And this time, it will certainly go beyond those four companies. By applying to build a semiconductor fabrication facility ("fab") in Dalian, Intel and its activities in China - including its involvement with iCafes - will come under unprecedented scrutiny. That list will certainly grow, and I will guarantee it will reach the door of those companies who are financing China's technology and Internet industries.

Today, Silicon Valley. Tomorrow Sand Hill Road and Wall Street.

Be ready, guys.

Posted at 11:05 AM

Wed - March 14, 2007

Can China Fly?

In the Hutong
Ventilating
1700 hrs.

When I tell people I grew up in West Los Angeles and Beverly Hills, they instantly begin talking about the movie business.

I always find that somewhat amusing, because when I was growing up I always thought of L.A. as an aviation town.

Santa Monica airport was the birthplace of the modern airliner, home of the Douglas DC-3. Lockheed, Hughes Aircraft, North American, Rockwell, Rocketdyne, McDonnell-Douglas in Long Beach, Northrop, TRW, and General Dynamics were more real to me than the dozen major (and dozens of minor) movie, television, and music production studios within equal proximity.

That was probably due to the fact that my mom had spent most of her career in aviation (first in the secretarial pool at North American, later as an executive assistant at Hughes), and my dad owned an aerospace subcontractor in Santa Monica (he made turbine parts alongside golf club heads.) They met at a coffee shop at the foot of the runway at Santa Monica airport. So jet fumes are kind of in my blood.

A+B ==> A+B+C+E+J+R

So as much as I would like to think that aviation is a high-technology business that America will forever dominate, the reality is far different. China is on a path to become an aviation powerhouse in the next couple of decades. If you don't believe me, believe Steven Udvar-Hazy, CEO of International Lease Finance Corporation (IFLC), Boeing's largest customer and despite his last name one of the smartest straight-talkers in the business.

He says the days of the Airbus-Boeing duopoly are numbered, and that challengers from China, Russia, and Japan will emerge within the next 15 years.

Now, before you choke on your coffee, thundering in protest that China has yet to keep in mind that the world's #3 manufacturer of commercial jets, Embraer, is Brazilian.

And think about a couple of things:

Is It Really About Innovation?

Sure, there are still advances, but not of the kind the industry saw in the quarter century between 1945 and 1970. We went from the DC-3 to the 747 in that period. In the 37 years since, we're still flying 747s as mainline aircraft. The fundamental technologies - the turbofan engine, the swept wing, the cigar-shaped hull, and the like have all been in place for years. Airplanes tend to get replaced because they're old, not obsolete. Great comfort to those of us who are white-knuckle flyers, but scant support for the idea that civil aviation is still a fundamentally innovation-driven business anymore.

Outsourcing Rules the Skies

Three or four decades ago, most of the fabrication of an airliner was done in facilities owned by the primary manufacturer. Major sub-assemblies, like engines, interior fittings, and avionics may have been made elsewhere, but the plane maker made the plane. That's not the case anymore.

Case in point: Boeing's newest airliner, the state-of-the-art 787 Dreamliner, is being manufactured in pieces around the world, by 48 companies in 7 countries, then assembled at Boeing in Seattle, including:

• Italian firm Alenia/Vought is building the horizontal stabilizer, center fuselage, and aft fuselage.

• Mitsubishi Heavy Industries and Fuji Heavy Industries are building the wing box.

* Kawasaki Heavy Industries is building the landing gear wheel well, main wing fixed trailing edge, and part of the forward fuselage

• Hamilton Sundstrand is building all of the electrical and hydraulic system.

• Rockwell Collins is making the Avionics

• Smiths in the UK is developing key control systems.

• Messier-Dowty in France is building the Landing Gear.

• Panasonic is doing the inflight entertainment system.

• Saab is building the cargo doors.

• Korea is building the raked wingtips.

• Dassault Systems in France is providing the software to help put it all together.

Essentially, Boeing develops the aircraft, sells it, manages the overall program, and manages integration and assembly. That's still a lot, but it's a lot less than what it did in the days when it was cranking out the first 747s.

China Could Fly

At some point, most of the worlds airlines are going to come to the conclusion that they'll be able to buy an aircraft entirely adequate for their purposes from someone other than Boeing or Airbus. In reality, it's already happening - Embraer and Bombardier have all but chased The Big Two out of the business for airliners with less than 90 seats. But it will happen in earnest when the differences between Boeing, Airbus, and, say, a Chinese aircraft manufacturer become esoteric enough that a large percentage of customers can ignore them.

Sure, maybe Southwest and Singapore won't be lining up to buy Chinese airliners all that quickly. But in places like sub-saharan Africa, South Asia, and Central Asia there would be a market for a Chinese airliner that offered 10 year old technology in a new aircraft at the right price.

Most of the components could be purchased from companies that currently supply Boeing, Airbus, Embraer, Bombardier, and Tupelov.

In other words, all China needs to do is put together a company capable of superb project management, careful assembly, smart design, and savvy marketing, and they could become a real player in the business.

Of course, that last little bit will be a challenge. Which is why it won't happen overnight.

And fortunately, China has a willing accomplice in teaching them the tools of the trade: Airbus, who is building an assembly plant in China for the A320 series and setting up a 500-desk design lab filled with Chinese engineers working on the A350.

TD-SCDMA With Wings

I was going to write something snarky about China's current high-profile jetliner project, the ARJ-21, but I want to reserve judgement. The thing has yet to even fly, but when it does I'm not going to count on its builders (Shanghai's ACAC consortium) or its local certification authority (CAAC) to tell me how well (or poorly) China has done in its latest effort to build a jetliner.

Instead, I'll wait to hear from airlines, pilots, and other credible third parties. China has a steep learning curve on it's way to becoming a global player in the airliner business, and I'm not sure how far along it will be two years from now.

Fifteen years from now, on the other hand...

Posted at 07:10 PM

Doing Business with Big Companies in China

In the Hutong
Watching the markets slide on CNBC
1105 hrs

I recently spoke to the China Entrepreneurs Council in Beijing on how a small firm (like mine) can do business with multinationals and SOEs tens of thousands of times our size.

Without regard to political correctness, I simply passed on (with some comment) the twelve rules of thumb we use to make sure we stay afloat. And so far so good - we've had no write-offs after nearly two years in business, having worked with 10 clients with over $1 billion in annual revenues.

Our Twelve Rules:

1. Know Your Non-Negotiables: Before you even make your next sales call, know where you will not compromise.

2. Don’t be a vendor: Be a trusted advisor – the first person they call when they have any problem.

3. Be a Vendor: Get yourself made an authorized vendor. You’ll get paid on time, and it will open up other opportunities with the customer.

4. Hire a “Guido:” Have one person in your company – not you – who is a collections artist

5. Run from large Chinese clients: Unless you can get 80% in advance

6. Seek customers who need to take risks They’ll be willing to bet on you rather than your bigger competition, and they want smarts and capability, not the low-risk/low-benefit solution.

7. Act big, Think Small: Have systems that will integrate into theirs, but never stop being nimble, grateful, and humble

8. Hold your head up… Don’t ever let them make you feel small. Walk away before allowing yourself to be treated badly.

9. …but don’t stick your neck out. Avoid the temptation to overcommit just to get or keep the business

10. Remember that “NO” is the most valuable word in your vocabulary: The more times you say “no,” especially on principle, the better you will do.

11. Your job is to get your customer promoted: Nobody ever got fired for hiring IBM. Nobody ever got promoted, either. You repay the customer's faith by getting the customer promoted.

12. Don’t drive a better car than the one your customer drives: Otherwise they’ll think they’re paying you too much.

Posted at 11:30 AM

Mon - March 12, 2007

How Many Billionaires

In the Hutong
Watching as a CNN story about nose-picking in China is censored off my screen.
(And hearing Kristi Lu Stout use the term "snot-rocket" on the air)
1017 hrs.

Reading The Hindu this morning, I cannot help but be impressed at the puffed-chest triumphalism in a story titled "India's dominance in the billionaires club shocks China."

One detects in this article - and similar coverage over the past few days - an implicit Indian inferiority complex vis-a-vis China.

As such, I'm happy for India - clearly, as a psychological boost, they needed it.

Show Us Your Money

I won't, therefore, rain on their party by suggesting that one of the reasons they have more billionaires may well be a growing reluctance among Chinese billionaires to step into the sun.

One wealthy Chinese remarked to me about a year ago that he and others he knew were no longer comfortable with showing up on the increasingly popular "wealthiest Chinese/Asians/humans" lists. In some very public cases, some of the self-declared wealthy have discovered the hard way that China's tax authorities - and other even less savory characters - are quite interested in these lists as well.

Many of China's wealthy are, therefore, increasingly focused on hiding their prosperity. Those who owe their wealth to means that either need not or must not - be public are not making them public. There are certainly plenty of places around the world to stash one's cash - no questions asked.

In reality, there are likely more billionaires than Forbes can identify in China. But that's not even the greater question.

Where Is It Going?

The real issue here is how those billions are being employed. I've gone through a personal political renaissance lately, but I still cannot bring myself to join the people who call for the statutory redistribution of wealth.

I can - and do - ask "what are you doing with your dollars?"

At the very least, Forbes should be examining the extent to which those billionaires are using their money to good purpose (i.e., putting it back into circulation to drive greater economic activity, or investing it in community or philanthropy), and evaluating those efforts.

Only then can we determine if the Forbes list actually means anything - for India, China, or anywhere else.

Posted at 11:55 AM

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